The disaster that is the Earthquake Commission

There’s been debates on this already at both Public Address and Kiwiblog, and probably elsewhere too, but there’s a lot of bullshit being talked about the government department that is the Earthquake Commission (EQC)—mostly about its liabilities after the Christchurch quake and what it calls its assets. Speaking frankly, there’s some numbers that don’t quite stack up, and a real question about why this particular government department even exists.

Christchurch itself has a big bill.  JP Morgan reckons there’ll be around a $4.3 billion bill to put New Zealand’s second-largest city back on its feet, or at least pull it up off its knees, of which Treasury Secretary John Whitehead calculates the government’s Earthquake Commission will have to stump up nearly half—even with their liability amounting to no more than $112,000 ($100k+GST) per house—with reinsurers and taxpayers picking up the balance.  (Nice of the taxpayer, don’t you think?)

Now, the EQC was set up after the war to socialise losses in time of earthquake or war damage. It’s like an ACC for houses: taking risk away from insurance companies and placing it squarely onto this government department. (Nice of the government to assume this liability on your behalf, don’t you think?)  Paid for by a compulsory levy on home insurance. (Nice of the government to take away your choice in the matter, don’t you think?)

So just to summarise: the government decided to assume the risk of earthquake damage, giving you (in your capacity as home-owner and insuree) no choice at all about joining their scheme, and (in your capacity as taxpayer) no choice at all about assuming the risk should the government department’s investments fail to pick up its tab. So, since the scheme is a sunk cost, you really have to hope their appointed bureaucrats would have the smarts to do the job required, wouldn’t you. Wouldn’t you? (Stop laughing at the back.)

Well, you can see just by that $100,000 figure that those bureaucrats are not exactly on top of their game; while there was a time when $100,000 would build you a replacement home (which is what the figure was supposed to cover) that time is very long ago. The grey ones at the EQC haven’t quite caught up with the inflation of the last few decades.

Since it’s had no major payouts since its inception, however, there’s been no major questions about its operations. Until now.  Cometh the disaster, cometh the questions.  Because while the drop in its liability per home means EQC is less exposed than it would be, leaving reinsurers and taxpayers to pick up the tab for which you’re paying your compulsory levies, the EQC will supposedly have built up for itself a large lump to pay for The Big One that everyone and his favourite geologist knew would be coming some time. A lump large enough to pay for this one and the one that might come soon after that, without putting the taxpayer (i.e., you and I) at risk.

So has it?

Well, “not so much.”

John Key told Q+A, and I quote,

the Earthquake Commission has enormous funds, 15 billion dollars, largely invested offshore… [including] about six billion in cash.

So it all looks good, then. The taxpayer won’t be called on. Phew.

Except it hasn’t got $15 billion at all.  Or anything like six billion in cash.  This is is just (what’s the word I’m looking for here?) flat-out bullshit. Because as the EQC’s on Annual Report reveals,

EQC has custody of the Natural Disaster Fund, around $5.6 billion of public money…[and because reinsurance kicks in after the first $1.5b of costs, this gives] an estimated value of up to $8.1 billion before having to call on the Crown Guarantee.

Oops.

Still, that should still cover things, shouldn’t it? We taxpayers are safe?

Except when you read more closely you discover that

approximately 67 percent of EQC’s portfolio is invested in NZ Government Stock and NZ Government inflation-indexed bonds.

And as you’re probably aware, this is where the word “invested” is something of a misnomer. Because NZ Government Stock and NZ Government bonds are nothing more than little bits of fancy printed paper backed by nothing more than … the NZ Government’s ability to tax you and me.

So much for those “enormous funds.” Because when all’s said and done, on the first occasion when it’s drawn on, we discover that the Earthquake Commission has—not $15 billion—not $8 billion—not even $5 billion—but little more than $1.5 billion of actual investments to draw on, the rest of their “assets” consisting only of a promise to make you and I pay.

Nice, huh.

So while the government quietly goes about starting the printing presses to avoid us working out how we’re being fleeced (producing fancy bits of government paper they call cash to back those other fancy bits of paper they call bonds to pay a bill with which you and I should never have been faced), can we please, just as quietly, get rid of this bureaucratic encumbrance (i.e., the EQC) and leave risk and insurance where it belongs—with the insurance industry. Because once they’ve made this pay-out, the EQC is an organisation with no funds, no backing, and no reason to exist. Let the people who do know what they’re doing do it. And stop the grey ones adding an avoidable man-made disaster to an unavoidable natural one.